The latest Romney claim about Bain Capital

“With regards to Bain Capital, they just put a report out about their record, the Bain Capital guys did. They noted they made about 350 investments since the beginning of their firm, and of those investments 80 percent of them grew their revenues.”

— Mitt Romney on Fox News, May 24, 2012

“The fact is that Bain Capital, there were a number of investments that didn’t perform well. In the case of Bain, it was less than 5 percent of the investments that ended up in bankruptcy. The fact is 80 percent of the companies he invested in grew. And that means that jobs were created. If you look, for example, at Sports Authority, 15,000; if you look at Brighter Horizons, 19,000; if you look at Staples, nearly 90,000 jobs created.”

Now that the “100,000 jobs created” talking point has been discredited, we sense a new talking point developing in the Romney campaign — that 80 percent of Bain Capital investments “grew their revenues.”

We’ve been highly skeptical of most of the attacks on Bain by the former Massachusetts governor’s GOP rivals and the Obama campaign, arguing on numerous occasions that the overall record of the investment firm is pretty good. But the point of private equity is to reward investors, not necessarily create jobs, which is where Romney’s defenders create problems for themselves.

So now Romney is citing Bain’s claim that 80 percent of their investments grew their revenues. Ed Gillespie, one of his aides, even suggested that revenues “means that jobs were created.” Is that the case?

The Facts

This new statistic appears to have emerged in a lengthy defense that Bain Capital — which Romney headed until 1999 — sent to its investors in March. (We should note that the letter approvingly quotes The Fact Checker for one of our analyses of an anti-Bain ad by Newt Gingrich.) The Bain letter said:

Despite political attacks that tend to emphasize the few companies that have struggled, the facts are that revenues grew during our ownership in 80 percent of the more than 350 companies in which we have invested. Our growth-oriented approach is reflected by our current portfolio companies, which have opened over 5,000 stores and facilities during our ownership. Today, our companies employ over one million people worldwide (including in every U.S. state) and generate over $155 billion of annual revenue…. Through more than a generation of investing, less than 5 percent of our companies filed for bankruptcy while under our control, a figure that is consistent with the broader economy and compares favorably considering the risks associated with private investing. In the vast majority of these cases, our work has resulted in better, more competitive companies.

The 5 percent bankruptcy figure may be a surprise to people familiar with the Wall Street Journal’s comprehensive examination of Bain Capital’s investments, which found that “about 22 percent of the companies either filed for bankruptcy or liquidated by the end of the eighth year after Bain invested.”

The operative words in the Bain statement are “under our control.” As long as Bain owned less than 50 percent — often the case if there had been a public share offering — then the success or failure apparently would not end up in Bain’s statistics.

Regarding the assertion that 80 percent of the investments yielded rising revenues, the Romney campaign directed us to Bain Capital. We asked for an accounting of the 350 firms and their revenue gain. Charlyn Lusk, a Bain spokeswoman, said she would answer our questions but then maintained radio silence, though not before asking us to correct the Wall Street Journal’s 22 percent figure with the dubious 5 percent claim.

Here’s why the 80 percent figure is problematic: It tells you almost nothing about the success or failure of these companies. In fact, it is almost surprising that the figure is not nearly 100 percent.

The Bain statement is so vague and imprecise that, in theory, revenues could grow in a single year, but fall in other years, and still be claimed as a growth in revenues. Moreover, the statistic takes no account of whether the business ultimately failed, despite revenue growth, because under Bain’s direction it had taken on too much debt.

As an example, let’s look at Ampad, the paper company that was the subject of a recent Obama ad. The company showed tremendous growth during the period of Bain’s control — in other words, before it offered shares to the public and Bain began to cash out. Documents filed with the Securities and Exchange Commission show that revenues, mainly through acquisitions, grew from $104 million in 1993 to $617 million in 1995. This, as we have noted before, was the company strategy — to build revenue through acquisitions.

Success story? After the initial public offering — when Bain reaped about $50 million and its control fell below 50 percent — revenues started to fall, to $572 million in 1999. Interest payments on the debt, run up to build that revenue, exceeded gross profits. In the space of a few years, the stock price went from $26 a share to 15 cents, at which point the company filed for bankruptcy protection.

Yet presumably, this company is part of Bain’s 80 percent “success” rate.

This graphic, from The New York Times, shows a similar tale for Dade, an Illinois medical company, where sales doubled, debt soared, and the size of the work force fell. Yet, presumably this would also be considered a “success story” under Bain’s metric.

Certainly, there are sophisticatedstudies that show additional business revenue can mean more jobs. But, unlike those studies, Bain has not been transparent about how this statistic was derived.

The other problem with this statistic — at least as the Romney campaign uses it — is that many of these investments took place long after Romney had left the firm, some 13 years ago, which makes it increasingly irrelevant to his skills or performance. (Gillespie, in his comment on CBS, rattles off figures for the current employment of companies in which Bain invested, even though this has virtually nothing to do with Romney’s involvement.)

The Pinocchio Test

Bain generally has a good story to tell, but they should not disguise their performance behind suspect statistics. Private equity plays an important role in the economy, especially in terms of providing financing to more risky companies or endeavors. But a successful private equity firm is judged on how much money it makes for its investors, not how much revenue grows or how many jobs are created.

We are willing to revisit this ruling if Bain Capital is willing to explain how it developed this statistic, showing exactly what companies were included and what time period was covered. Until we can verify this figure, it means little — and the Romney campaign should stop using it as well. At the moment, it appears rather dubious.

Three Pinocchios

UPDATE: After this column appeared, Bain Capital sent us the following statement. The reference to “media reports” appears to refer to The Wall Street Journal analysis. This statement does not answer our question about the revenue claims, so we will maintain our Pinocchio ruling.

“Bain Capital is a private company, not a political organization. We stand behind the information in the letter we sent to our investors in March, which was created to inform them, not to be a part of a political campaign where too often data is taken out of context and distorted. It is a fact that fewer than 5% of our portfolio companies over the past 28 years have filed for bankruptcy while under our control. This figure is consistent with the broader economy and compares favorably considering the risks associated with private investing. Suggestions of a higher number in media reports earlier this year are simply false and were based on a flawed methodology that excluded literally dozens of investments, and included companies that we did not even own at the time of bankruptcy. Bain Capital is very proud of the integrity and hard work our employees and management teams have brought to the challenge of growing businesses in both strong and weak economic periods.”